What Is The Gold To S&P Ratio?
It measures the value of stocks relative to Gold. It's used by traders as a gauge of overall risk appetite.
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We have a question from Sergiy, he said he saw a headline on Bloomberg talking about the recent rise in Gold prices and the headline alluded to the Gold and S&P ratio and wants some more info on it.
So, by looking at the chart, if you have Tradingivew by the way you can set up your own S&P500 to Gold chart by just using this code SPX/GC1!, that will give you the ratio, and for demonstration purposes I’ve just added the gold chart as an overlay on top to put the article you referred to into perspective.
So, generally speaking the ratio is simply comparing the value of something like the S&P500 to the value of Gold, you can do this with anything really like Silver or Oil etc.
The idea here is that the higher the ration goes, the more expensive the S&P becomes relative to the value of Gold, so that would be indicative of a risk on environment, and environment where investors pile into risk assets and prefer risk assets over safe havens like Gold.
And of course, vice versa, the lower we go down in the ration the more expensive gold becomes relative to the S&P500 and points to a risk off environment, where investors want to protect their portfolio by preferring safer investments like Gold compared to stocks.
If we compare this with the time lines of the big bubbles and recessions it makes sense, early 80 running into the dot com bubble the ratio was at the highest where stocks outperformed anything else, going into the first massive recession of 2000 and into the GFC we saw the ratio completely reverse as investors sought safer havens to store their wealth and as gold is also seen as an inflation hedge we also saw the ration further slump lower from 2009 as QE stepped in and brought about fears of inflation and of course brought financial repression which made Gold even more attractive.
So the idea behind the article that you cited is that the recent jump in Gold prices, even though it was very impressive, barely moved the needle of the ratio, and the reason for that is that even though Gold has had a major run to the upside, equities have also performed very well as we all know, and we know the reason for the recent run has been massive unprecedented support from the FED, which from a QE point of view has supported both Gold and Equities.
The statement assumes that this double performance remains in place though, meaning that Gold and equities continue to grind higher together at the same relative pace, which given history would be an assumption that could be proven wrong as some analysts are calling for Gold to go to $3000 quite easily if we follow the same pace of growth as we did back from 2009 to 2011.
But that also assumes that investors will have the same fears over inflation as they had back then, which might not be the case, and it also assumes the FED leaves QE on the table for another 5 years, but given the sheer size of the current stimulus and bond buying, we might recover a lot quicker this time round after going through a mess like this already which means we might not have the same upside momentum in gold this time round.
So, all in all, I can see why investors look at this, but from a trading perspective it’s not something that I even really look at all that much and isn’t really something that I would take trades on if that makes sense.
So, hope that helps Sergiy, any other questions don’t hesitate to let us know.
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If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have a question from Sergiy, he said he saw a headline on Bloomberg talking about the recent rise in Gold prices and the headline alluded to the Gold and S&P ratio and wants some more info on it.
So, by looking at the chart, if you have Tradingivew by the way you can set up your own S&P500 to Gold chart by just using this code SPX/GC1!, that will give you the ratio, and for demonstration purposes I’ve just added the gold chart as an overlay on top to put the article you referred to into perspective.
So, generally speaking the ratio is simply comparing the value of something like the S&P500 to the value of Gold, you can do this with anything really like Silver or Oil etc.
The idea here is that the higher the ration goes, the more expensive the S&P becomes relative to the value of Gold, so that would be indicative of a risk on environment, and environment where investors pile into risk assets and prefer risk assets over safe havens like Gold.
And of course, vice versa, the lower we go down in the ration the more expensive gold becomes relative to the S&P500 and points to a risk off environment, where investors want to protect their portfolio by preferring safer investments like Gold compared to stocks.
If we compare this with the time lines of the big bubbles and recessions it makes sense, early 80 running into the dot com bubble the ratio was at the highest where stocks outperformed anything else, going into the first massive recession of 2000 and into the GFC we saw the ratio completely reverse as investors sought safer havens to store their wealth and as gold is also seen as an inflation hedge we also saw the ration further slump lower from 2009 as QE stepped in and brought about fears of inflation and of course brought financial repression which made Gold even more attractive.
So the idea behind the article that you cited is that the recent jump in Gold prices, even though it was very impressive, barely moved the needle of the ratio, and the reason for that is that even though Gold has had a major run to the upside, equities have also performed very well as we all know, and we know the reason for the recent run has been massive unprecedented support from the FED, which from a QE point of view has supported both Gold and Equities.
The statement assumes that this double performance remains in place though, meaning that Gold and equities continue to grind higher together at the same relative pace, which given history would be an assumption that could be proven wrong as some analysts are calling for Gold to go to $3000 quite easily if we follow the same pace of growth as we did back from 2009 to 2011.
But that also assumes that investors will have the same fears over inflation as they had back then, which might not be the case, and it also assumes the FED leaves QE on the table for another 5 years, but given the sheer size of the current stimulus and bond buying, we might recover a lot quicker this time round after going through a mess like this already which means we might not have the same upside momentum in gold this time round.
So, all in all, I can see why investors look at this, but from a trading perspective it’s not something that I even really look at all that much and isn’t really something that I would take trades on if that makes sense.
So, hope that helps Sergiy, any other questions don’t hesitate to let us know.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
